Lesson 26 AGGREGATE DEMAND

I. Read and memorize the following words, word- combinations and word-groups:

aggregate demand — сукупний попит

e.g. When price and nominal-wage adjustments are slow,

changes in aggregate demand will lead to changes in actual real output.

to employ fully productive resources — повністю викори­

стовувати виробничі ресурси

e.g. Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

individual consumption — індивідуальне споживання e.g. Individual consumption is directly influenced by

individual income.

to save income — накопичувати прибуток

e.g. Individuals (and economies that are not engaged in International trade) can only do two things with their income: they can consume it or save if.

to smooth consumption — вирівнювати споживання e.g. Aggregate consumption may differ from aggregate

real output because individuals want to save in order to smooth

consumption relative to income.

life cycle consumption behavior — режим споживання упродовж життя

e.g. In pari, current consumption wifi be based on our

best estimate of our lifetime income and how long we expect to live- This kind of smoothing behavior is a life-cycle consumption behavior, saving — заощадження

e.g. Saving allows people to transfer consumption from

the present to the future, investment — інвестиції

e.g. If desired investment exceeds desired saving, firms

will find that their inventories are lower than they want them to be.

inventories — оборотні фонди; (товарно-)матеріальні

запаси

e.g. If desired aggregate saving exceeds desired aggregate

investment, firms will accumulate unwanted inventories, adjustment — регулювання

e.g. Many different kinds of adjustment might occur. Prices

may change. Interest rates may change. fiscal policy (activities) — фіскальна політика (діяльність);

фіна не ов о-бюджетна політика

e.g. Government spending, taxes, and subsidies are the fiscal activities of government.

marginal propensity to consume — гранична схильність

до споживання

e.g. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

capital stock — основний капітал

to offset depreciation — компенсувати знецінення

e.g. Investment occurs when real output is used to increase

the existing capital stock or offset depreciation.

II. Give English equivalents of the following:

фінан co во-бюдже тн a діяльність уряду

виходити на пенсію

змінюватися місяць за місяцем

побічно впливати на сукуп­

ний попит

наміри зацікавлених фірм або осіб

режим споживання упродовж життя

вирівнювати споживання гранична схильність до спожи­

вання

III. Fill in the blanks with appropriate words:

1. Saving allows people to ... consumption from the present to the future, 2. We also save because of uncertainty about our future ... and about how long we will live, 3. ... consumption will not be based solely on current income. 4. Investment occurs when real output is used to ... the existing capital stock. 5. If desired investment exceeds desired saving, firms will find that their inventories are ... than they want them to be. 6. Increased government expenditure increases aggregate ... „ 7. Many different kinds of might occur. Prices may change. Interest rates may change,

current transfer adjustment lower income demand increase

IV. Read and translate the text:

Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

Supply and demand help us organize the way we think about these markets because each directly corresponds to the intentions of self-interested firms or individuals.

Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

Individual consumption is directly influenced by individual income.

While consumption is undoubtedly related to income, it is unlikely that consumption will vary exactly as income varies.

Saving is foregone consumption. Essentially, saving allows people to transfer consumption from the present to the future.

When a person's income fluctuates from month to month, he or she can smooth consumption by saving and dissaving and consumption will be based on some expected or average monthly income rather than on actual monthly income.

Aggregate consumption may differ from aggregate real output because an individual wants to save in order to smooth consumption relative to income.

What determines current consumption if we save for

retirement? in part, current consumption will be based on our

best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is known as life-cycle consumption behavior.

We also save because of uncertainty about our future income and about how long we will five. We may get sick or Injured in some way or we may become unemployed. If we do, our income will fall, perhaps dramatically.

Saving is a way of transferring current income into future consumption. Because of fluctuating incomes associated with our

jobs, declining incomes with retirement, and uncertainties about length of life, sickness, incapacitation, or unemployment, individuals will choose to consume some of their current income and save or

dissave, thereby smoothing consumption through time.

Current consumption will not be based solely on current income. investment occurs when real output is used to increase the

existing capital stock or offset depreciation.

If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories. Conversely, if desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

Many different kinds of adjustment might occur. Prices may change. Interest rates may change. The production of real output may change. It turns out that with sticky prices, output changes occur before prices fully respond.

Individuals make consumption and saving decisions. Firms make investment decisions. But there is another participant in the economy — the government. Government activities may affect the economy in one of two ways. First, government spending directly affects aggregate demand. Second, government taxes and subsidies directly affect consumption, saving, and investment and, hence, indirectly affect aggregate demand. Government spending, taxes, and subsidies are the fiscal activities of government.

Increased government expenditure (like increased desired consumption or increased desired investment) increases aggregate demand. Decreased government expenditure (like decreased desired consumption or decreased desired investment) decreases aggregate demand.

Since consumption expenditures are determined by income, albeit in complex ways, changes in income will also affect consumption. How individuals respond to changes in income turns out to be important. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

V. Answer tfie following questions:

1. What is individual consumption influenced by?

2. What phenomenon is known as life-cycle consumption be­havior?

3. What is the consequence, when desired saving is not equal to desired investment?

4. What is referred to as fiscal policy?

5- What can individuals do with their income?

6. Why may aggregate consumption differ from aggregate real output?

7. What can you say about government expenditures?

VI. Define the terms:

fiscal activities of government aggregate demand life-cycle consumption behavior aggregate supply marginal propensity to consume (MPC) saving

VII. Translate into English:

1. Фірми виробляють товари, тому що споживачі бажають купити їх. 2. Накопичення сприяють створенню капіталу та економічному зростанню. 3. Державні видатки, податки та субсидії — це фінансово-бюджетна діяльність уряду.

4. Сукупний попит знижується, коли зростають податки, і зростає, коли податки зменшуються. 5. У сучасній ринковій економіці зміни в сукупному випуску спостерігаються частіше, ніж зміни в загальному рівні цін. 6. Люди можуть витрачати або заощаджувати свій прибуток. 7. Розв'язання таких питань, як державні видатки, податки та субсидії належить до сфери фінансово-бюджетної політики.

VIII. Read and dramatize the following dialogue:

Banker:M rs. West, I was sorry to hear of your husband's death.

Mrs. West: Thank you. I'm pleased that the bank was named executor of the estate.

B.: Well help you in every way we can. We've looked through the contents of the safe-deposit box and made an inventory. Everything seems to be in good order.

Mrs. W.: I know so little about my husband's affairs.

B.: Our counseling service is for people in just your

position.

Mrs. W.: I'm most concerned about my immediate expenses.

B.: Well, we're empowered under the terms of the will to provide you with an allowance until the estate has been probated.

Mrs. W.: Oh, that's fine.

B.: And there are three life insurance policies. You are the beneficiary in each of them.

Mrs. W.: Yes, I knew about those.

B.: The benefits from these policies will be paid directly to you within the next two weeks.

Mrs. W.: Oh, I don't have to worry, then.

B.: No. The income from your inheritance is going to be quite sizable. Of course, we don't know yet what demands will be made against the estate.

Mrs. W.: As far as I know, there are no large creditors.

В.: We hope not. You understand, also, that this bank is named trustee under the will. This means that we will take care of the portfolio of an annual report of

all transactions.

Mrs. W.: Yes, I understand that. I feel much better about the future now.

IX. Make up your own dialogue using the following expressions and word-combinations:

aggregate demand	to employ fully productive resources
aggregate income	to smooth income
fiscal policy	to offset depreciation
desired investment	desired saving

X. Combine the given two sentences into one using the Objective Infinitive Complex:

M o d e l : They will tell us about Trust Services, I expected.

I expected them to tell us about Trust Services.

1. Firms made investment decision. I heard it. 2. Increased government expenditure increases aggregate demand. We consider it. 3. We save because of uncertainty about our future income and about how long we shall live. The life caused it. 4. Individual consumption is directly influenced by individual income. We think so. 5. Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate. We know it. 6. Saving is a way of transferring current income into future consumption. I suppose it.

XL Change the following complex sentences into simple ones using the Objective Infinitive Complex;

M o d e l : W e expect that firms produce goods of high quality.

We expect firms to produce goods of high quality.

1. People expect that saving allows them to transfer consumption from the present to the future. 2. We think that the firms accumulate unwanted inventories, if desired aggregate saving exceeds desired aggregate investment. 3. We consider that government spending, taxes and subsidies are the fiscal activities of government. 4. Consumers believe that they purchase goods of high quality. 5. We know that changes in aggregate demand lead to changes in actual real output.

XII. Translate into English:

1. Нам дуже хотілося б, щоб споживачі із задоволенням купували наші товари. 2. Ми вважаємо, що в неї дос­

татній власний досвід у цій сфері виробництва і вона може розпочати свою справу. 3. Я сподіваюся, що ти навчишся накопичувати свої прибутки. 4. Я знаю, що сукупний попит знижується, коли зростають податки. 5. Батьки сподіваються, що він стане гарним підприємцем і матиме власний бізнес.

XIII. Communicative situations:

1. What will happen to aggregate demand if firms become more pessimistic about the future?

2. What will happen to aggregate demand if firms become more optimistic about the future?

3. Discuss the ways in which government activities may affect the economy.

Lesson 27

FURTHER CONSTRAINTS ОN STABILIZATION POLICY

I. Read and memorize the following words, word- combinations and word-groups:

stabilization policy — політика стабілізації економічної

кон'юнктури

e.g. If is important to remember that the crucial issue for

stabilization policy is whether an economy moves towards full

employment quite rapidly or quite slowly.

interest rate — ставка відсотка

e.g. Appropriate fiscal policy will be relatively more effective if stimulative policies do not affect interest rates by much or

interest rates do not affect investment by much.

elasticity — еластичність; гнучкість

e.g. long-term monetary policies will be affected by the income elasticity of demand for real money balances and the price-level elasticity of demand for nominal money balances. monetary policy — грошово-кредитна політика

e.g. A stimulative monetary policy requires an increase in

the money supply.

automatic stabilizer — автоматичний стабілізатор економіки e.g. An automatic stabilizer is an expenditure law or tax law that automatically increases expenditures (or decreases taxes) when an economy enters a recession.

government transfer payments — урядові трансфертні

виплати

e.g. Since more people are becoming unemployed during

a recession, government transfer payments increase predictability — можливість прогнозування

e.g. Predictability is important in efficiently organizing economic activity and the inconsistency of expectations creates a less predictable economic environment.

II. Give English equivalents	of the following:
відносна ефективність	ставка відсотка
фінансово-бюджетної та	довгострокова політика
грошово-кредитної політики	можливість прогнозування
тимчасові зміни в доходах	економічне середовище
урядові трансфертні виплати	стимуляційні заходи
спад виробництва	податкова політика

III. Fill in the blanks with appropriate words:

1. The relative effectiveness of fiscal andmonetary policies depends on the interest elasticities of investment demand and money ... . 2. The response of the demand for mo­ney to a change in the level of real ... is also important to stabilization policy. 3. With a ... tax cut, individuals should expect lower disposable income in the future because taxes will ... after that, 4. To offset changes in desired invest' ment requires a relatively large ... . 5. Consumption ... fully to changes in income. 6. An automatic stabilizer is an expendi­ture law or tax law that automatically increases ... when an economy enters a recession. 7. Government transfer payments automa­tically increase during a recession and automatically decrease during ... or ... .

increase does not respond a boom temporary demand increases output expenditures recovery tax change

IV. Read and translate the text:

It is important to remember that the crucial issue for stabilization policy is whether an economy moves toward full employment quite rapidly or quite slowly. In short, the important question for much of macroeconomics is: How long is the long run?

Even if stabilization policies were useful because they could move the economy toward full employment or stabilize prices more quickly than the economy would of its own accord, there remains an important policy issue: What is the best way to stabilize the economy — with activist, countercyclical monetary and fiscal policies or with nonactivist, rule s-direc ted monetary and fiscal policies?

The relative effectiveness of fiscal and monetary policies depends in part on how sensitive desired investment and the demand for money are to interest-rate changes or_r in the

jargon of economics, on the interest elasticities of investment demand and money demand.

Obviously appropriate fiscal policy will be relatively more effective if stimulative policies do not affect interest rates by much or if interest rates do not affect investment by much (that

is, if crowding out does not occur).

Monetary policy will be less effective if either the demand for money is inelastic with respect to the interest rate or if desired investment is inelastic with respect to the interest rate.

The response of the demand for money to a change in the level of real output is also important to stabilization policy. Long­

term monetary policies will be affected by the income elasticity of demand for real money balances and price-level elasticity of

demand for nominal money balances. Because individuals use saving as a way of smoothing consumption relative to changes in income, temporary changes in income will not necessarily result in consumption changes of equal size. This poses a serious problem for fiscal policy. If a tax change, say a tax cut designed to stimulate aggregate demand, is perceived as temporary, individuals might increase consumption somewhat but are more likely increase their saving in order to smooth consumption. Why? With a temporary tax cut, individuals should expect lower disposable income in the future because taxes will increase after the temporary fax cut. Consumption does not respond fully to changes in income. To offset changes in desired investment which would otherwise lead to a change in aggregate demand, then, requires a relatively large tax change. In addition if the tax change is viewed as temporary, consumption may not change.

Temporary change in tax policy will not affect consumption much since consumption is determined by expectations about income over a long period of time.

An automatic stabilizer is an expenditure law or tax law that automatically increases expenditures (or decreases taxes) when an economy enters a recession, and automatically decreases expenditures (or increases taxes) when an economy enters a period of inflation.

A second source of macroeconomic stability \s the relative stability of government expenditures through economic cycles. While investment and, to some degree, consumption

expenditures rise and fall with the economic cycle, the relative stability of government expenditures means that these expenditures become relatively more important during recessions and relatively less important during booms,

A third source of macroeconomic stability is the government's transfer system. During a recession, individuals automatically qualify for welfare and unemployment compensation should they become unemployed. Since more people are becoming unemployed during a recession, government's transfer payments increase. Conversely, during a recovery or a boom when the unemployment rate decreases, so do unemployment and some transfer payments.

Government transfer payments automatically increase during a recession and automatically decrease during a recovery or boom, thereby automatically stabilizing the economy.

An important reason for rule-governed policy is that expectations about policy responses can influence how a policy affects an economy. Predictability is important in efficiently organizing economic activity and the inconsistency of expectations with the actual policies pursued will create a less predictable economic environment.

V. Answer the following questions:

1. Why will permanent tax cuts lead to larger increases in consumption than temporary tax cuts?

2. When will fiscal policy be more effective?

3. What are the main sources of economic stability?

4. What is an important component of aggregate demand?

5. What does the relative effectiveness of fiscal and monetary policies depend on?

6. When will appropriate fiscal policy be relatively more effective?

7. What will temporary changes in income result in?

8. What is an important reason for rule-governed policy?

VI. Define the following terms:

recession	monetary and fiscal policies
automatic stabilizer	predictability
interest rate	to create a predictable economic
temporary tax cut	environment

VII. Translate into English:

1. Тимчасові зміни в податковій політиці не впливають на рівень споживання. 2. У 1964 р. Конгрес знизив податки на 18 %, що зумовило підвищення рівня споживання. 3. Високий рівень податків автоматично стабілізує економіку. 4. За

фінансовий 1980 рік зовнішній національний борг США становив $121 мільярд. 5. Уряд США виплатив $12 мільярдів за відсотками. 6. Уряд повинен керувати грошово-кредитною та

фінансово-бюджетною політикою. 7. Економісти неодностайні щодо стабільності сукупного попиту. 8. Трансфертні виплати уряду автоматично збільшуються під час спаду виробництва і зменшуються в період економічної стабільності.

VIII. Read and dramatize the following dialogue:

A,: The effectiveness of active stabilization policies, either fiscal or monetary, depends in part on the expectations of individual consumers and firms.

S.: I see, but this is an area of considerable dispute since it is difficult to know precisely how individuals form expectations and how expectations, once formed, change. What do expectations depend upon?

A.: Expectations depend upon the availability and costs of gathering information. For example, how rapidly the labor market returns to equilibrium depends upon how sticky nominal wages are.

S.: And what are nominal wages adjusted to?

A.: Adjustments in nominal wages depend very much upon the expectations that individuals have about the effect of changes in aggregate demand and policy responses on the price level.

B.: Even if everyone knew that the price level would decline

(or increase), by how much it would decline may be a much more difficult issue.

A.: Yes, if the price level will decline a lot, nominal wages will also have to decline a lot in order to move the labor market back to full employment. If some people believe that the price level will only decline a little or perhaps not at all, unemployment will persist until these expectations change.

B.: This is a particularly interesting area because there is a considerable disagreement among economists.

A.: As you know economists are notorious for disagreeing about policy matters,

В.: And what is the source of policy disagreements?

A.: Some economists believe that the best way to maintain a steady growth in aggregate demand is for the government to pursue steady fiscal and monetary policies. These economists believe that aggregate demand is stable and they are in favor of nonactivist policies. B.: What are they called?

A.: These economists are called «Monetarists» or more recently

«The New Classical Economists». Other economists (so- called «Keynesians») believe that aggregate demand is quite unstable. These economists are in favor of active sta- bilization policies.

B.: And what can you say to summarize our discussion?

A.: Despite these disagreements there is an agreement that optimal stabilization policy tends to stabilize nominal GNP.

IX. Make up your own dialogue using the following expressions:

to maintain steady growth aggregate demand

to favor activist/nonactivist policies full employment

stabilization policies long-term policies temporary changes income elasticity to smooth consumption to offset changes

X. Change the following sentences into simple ones using the Subjective Infinitive Complex:

1. It is believed that optimal stabilization policy tends to stabilize nominal GNP. 2. It is reported that aggregate demand is stable, 3. It is expected that nominal wages will also decline a lot. 4. It was supposed that the effectiveness of active stabilization policies depended on the expect ations of individual

consumers and firms. 5. It is said that unemployment will persist.

XL Change the sentences according to the model:

M o d e l : It proved that you were right. You proved to be right.

1. It seems that the circumstances have become strange indeed. 2. It seems that this is not the right key. 3. It turned out that the expectations of individual consumers and firms changed. 4. It chanced that he understood how hard it was.

5. It appeared that this was an area of considerable dispute.

6. It seems that they don't understand how rapidly the labor market returns to equilibrium.

XII. Translate into English:

1. Кажуть, що експедиція зібрала дуже цікавий матеріал про природні ресурси цього району. 2. Вважають, що економісти дійшли згоди щодо ефективності грошово-кредит- ної політики. 3. Як повідомляють, податки зростуть. 4. Як відомо, можливість прогнозування є дуже важливою для організації економічної діяльності. 5. Здається, дедалі більше

людей цікавляться економічними питаннями. 6. Сталося так, що тимчасові зміни в оподаткуванні вплинули на прибуток.

XIII. Communicative situations:

1. Speak about macroeconomic coordination problems.

2. Why do economists disagree on appropriate stabilization policies? Discuss it.